Thursday, January 12, 2023

How To Report Ppp Loan On Schedule C

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When Did You Apply For Ppp

SELF-EMPLOYED: PPP Loan Forgiveness [2021 Reporting on Taxes?] PPP Forgiveness for Schedule C & F

When you first applied for your PPP loan you likely submitted your 2019 schedule C tax return and payroll records , to your bank in order to calculate how big of a PPP loan you would qualify for, right?

If you have no W-2 employees: Your maximum loan amount should have been $20,833 as a sole proprietor .

If you have W-2 employees: Your maximum loan was your average monthly payroll x 2.5 months capped at $100,000 per employee .

So basically, the max would have received was around $20,000 per employee, including yourself, if your employees make over $100,000 per yearand proportionally less for each employee who made under $100,000/yr.

Now lets discuss how exactly you should paid yourself as a Schedule-C earner to maximize your PPP forgiveness

I’d Like To Make This As Easy As Possible

Congress made PPP forgiveness rules increasingly lax because that’s what businesses lobbied their elected representatives for.

At a Senate Small Business Committee hearing in June 2020, Utah Sen. Mitt Romney said some of his constituents were “beginning to be concerned about whether or not they’re going to be qualified for forgiveness” and expressed hope “that we’re not sticklers, that we instead are looking to help people get forgiveness.”

At the same hearing, Louisiana Sen. John N. Kennedy told then-Treasury Secretary Steven Mnuchin that “small businesswomen and small businessmen think that the federal government is going to double-cross them on the forgiveness of these loans. You need to be mindful of that.”

In response, Mnuchin offered assurances that “the majority of this money is going to be forgiven in the next few months, and that’s our intent,” adding that “I’d like to make this as easy as possible.”

He made those remarks despite acknowledging that some well-resourced loan recipients, such as the Los Angeles Lakers, should not have applied for the funding, which they later returned.

“We thought that people would self-select appropriately,” Mnuchin told the committee, “and unfortunately there were a number of companies that were high-profile that took the loans.”

At that hearing, Mnuchin pledged that government officials would be stricter with PPP loan forgiveness than with loan approvals.

How Can Ppp Loans Be Used By Individuals With Income From Self

The proceeds of a PPP loan are to be used for the following.

  • Owner compensation replacement, calculated based on 2019 net profit
  • Employee payroll costs for employees whose principal place of residence is in the United States, if you have employees
  • Mortgage Interest, Rent, and Utility Payments
  • Mortgage interest payments on any business mortgage obligation on real or personal property
  • e.g., the interest on your mortgage for the warehouse you purchased to store business equipment or the interest on an auto loan for a vehicle you use to perform your business
  • Business rent payments
  • e.g., the warehouse where you store business equipment or the vehicle you use to perform your business
  • Business utility payments
  • e.g., the cost of electricity in the warehouse you rent or gas you use driving your business vehicle).
  • Note: You must have claimed or be entitled to claim a deduction for mortgage interest, rent, and utility expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the eight-week period following the first disbursement of the loan. For example, if you did not claim or are not entitled to claim utilities expenses on your 2019 Form 1040 Schedule C, you cannot use the proceeds for utilities during the eight-week period following the first disbursement of the loan.

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    First Draw Ppp Loan If You Have No Employees

    If you are self-employed and have no employees, the SBA provides the following instructions in the March 3, 2021 for new PPP loan borrowers:

    If you have no employees, use the following methodology to calculate your maximum loan amount:

    Step 1: From your 2019 or 2020 IRS Form 1040, Schedule C, you may elect to use either your line 31 net profit amount or your line 7 gross income amount. If this amount is over $100,000, reduce it to $100,000. If both your net profit and gross income are zero or less, you are not eligible for a PPP loan.

    Step 2: Calculate the average monthly net profit or gross income amount .

    Step 3: Multiply the average monthly net profit or gross income amount from Step 2 by 2.5. This amount cannot exceed $20,833.

    This is the amount most self employed borrowers with no employees will use to qualify for a first-time PPP loan.

    How to Substantiate Your Income

    You must provide the 2019 or 2020 Form 1040 Schedule C with your PPP loan application to substantiate the amount for which you applied. You must also include a 2019 or 2020 IRS Form 1099-MISC detailing non-employee compensation received , invoice, bank statement, or book of record that establishes you are self-employed. If using 2020 to calculate loan amount, this is required regardless of whether you have filed a 2020 tax return with the IRS. You must provide a 2020 invoice, bank statement, or book of record to establish you were in operation on or around February 15, 2020.

    How The Paycheck Protection Program Went From Good Intentions To A Huge Free

    How To Fill Out Schedule C For PPP Loan

    When the Paycheck Protection Program launched during the pandemic shutdowns of spring 2020, it immediately became a chaotic free-for-all.

    Government officials acknowledge that the program was rife with fraud and did not weed out undeserving applicants. But there was a way to remedy those early errors: Deny forgiveness. That could have thwarted scam artists and forced businesses that prospered to repay the money.

    Yet nearly three years after the rollout of PPP, the vast majority of loans have been forgiven.

    An NPR analysis of data released on Jan. 8 by the Small Business Administration found that 92% of the loans issued have been granted full or partial forgiveness. That includes loans to companies with mega-rich owners.

    “The PPP program seems to have resulted in billions of dollars of fraudulent loans that have ultimately turned into grants,” said Samuel Kruger, an assistant professor of finance at the University of Texas at Austin who co-authored a paper estimating that $64 billion of the nearly $800 billion in loans issued show signs of fraud, such as suspiciously high payrolls and multiple businesses listed at the same home address.

    The SBA disputes those findings, but its own inspector general has estimated that at least 70,000 loans are potentially fraudulent. An unknown additional number of loans went to companies that didn’t need PPP funding to survive the pandemic.

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    How Do I Calculate My Loan Amount If I Have Employees

    Step 1: Compute 2019 payroll by adding the following:

  • Your 2019 Form 1040 Schedule C line 31 net profit amount , up to $100,000 annualized. If this amount is over $100,000, reduce it to $100,000. If this amount is less than zero, set this amount at zero
  • 2019 gross wages and tips paid to your employees whose principal place of residence is in the United States computed using 2019 IRS Form 941 Taxable Medicare wages & tips from each quarter plus any pre-tax employee contributions for health insurance or other fringe benefits excluded from Taxable Medicare wages & tips subtract any amounts paid to any individual employee in excess of $100,000 annualized and any amounts paid to any employee whose principal place of residence is outside the United States and
  • 2019 employer health insurance contributions , retirement contributions , and state and local taxes assessed on employee compensation .
  • Step 2: Calculate the average monthly amount .

    Step 3: Multiply the average monthly amount from Step 2 by 2.5

    Step 4: Add the outstanding amount of any EIDL made between January 31, 2020 and April 3, 2020 that you seek to refinance, less the amount of any advance under an EIDL COVID-19 loan .

    You Just Want To Tell These People ‘do Your Job’

    So who are the small percentage of borrowers with unforgiven PPP loans?

    According to NPR’s analysis of SBA data, the majority belong to one-person businesses companies the Paycheck Protection Program most intended to help and people whose loans were processed by financial technology companies, or fintechs, a nebulous term broadly defined as businesses that use technology to automate financial services.

    Those two categories of borrowers are interrelated, because one-person companies were more likely to get their loans through fintechs than through traditional banks, which were criticized for neglecting smaller PPP applicants in favor of larger banking clients.

    NPR found that the smallest businesses sole proprietors like barbers, janitors and hairdressers hold the highest rate of unforgiven loans, at 13%. By contrast, only 3% of all businesses with at least 10 employees have unforgiven loans.

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    And in December, a lengthy congressional report accused several fintechs of hastily approving PPP loans to collect lucrative loan-processing fees, while ignoring obvious signs of borrower fraud. Meanwhile, a class-action lawsuit against the fintech Kabbage, which recently declared bankruptcy, alleges it was quick to approve PPP loans but dropped the ball when it came to forgiving them. Other fintechs appear to have a backlog of forgiveness requests, too.

    In fact, according to an NPR analysis, about three-quarters of all unforgiven PPP loans involve fintechs.

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    Nerships And Corporations Only

    If you are required to complete Schedule L Balance Sheet per Books, you can report your PPP loan balance on the balance sheet. The loan amount should be reported as liability. The loan balance could be reported as a nonrecourse loan or as a mortgage, note, or bond payable in one year or more, depending on how your business classifies the loan. It is important to note that PPP loans are 100% guaranteed by the federal government, which makes them nonrecourse debt. If your PPP loan was received and forgiven in the same tax year, the loan balance may not need to be reported on Schedule L.

    If all or a portion of your PPP loan was forgiven, you may have recognized book income for financial accounting purposes. Because forgiven PPP loan proceeds are not considered taxable income on your Federal return, you would need to recognize a book-tax difference on Schedule M-1 Reconciliation of Income per Books With Income per Return, if you are also required to file that schedule.

    Which States Are Taxing Forgiven Ppp Loans

    How to Complete Self-Employed PPP Loan Forgiveness Application [Form 3508S] Schedule C Payroll

    Florida, Nevada, and Utah are taxing forgiven PPP loans while Rhode Island has a tax on PPP loans that exceed $250,000. All the other states do not have a tax on Paycheck Protection Program loans.

    So, why the discrepancy? When Congress enacted the CARES Act on March 27, 2020, the intention was to exclude forgiven PPP loans from taxable income at the federal level. However, the Act did not directly amend the Internal Revenue Code, which considers forgiven debt as taxable income. Thus, under normal circumstances, a forgiven PPP loan would still be taxable, which would contravene Congressâ intentions.

    To avoid confusion, lawmakers passed the Consolidated Appropriations Act on December 21, 2020. Among other things, the Act specified that any forgiven PPP loan is exempt from tax at the federal level and that small business expenses paid for using PPP loans are deductible as well.

    Both the CARES Act and the Consolidated Appropriations Act passed legislation at the federal level. However, states usually use the IRC as their starting point for state tax codes. Since the IRC does not exempt a forgiven PPP loan from taxable income, states had two options:

    • Adopt a rolling conformity and use federal tax changes that exempt PPP loans from taxable income, or
    • Enact individual laws based on the IRC, which includes forgiven loans in taxable income.

    Below is a state-by-state table with PPP loan tax implications as well as tax deductions on PPP loan expenses.

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    Can I Apply To The Ppp Through More Than One Lender

    Yes! There is no harm in applying through more than one lender. In fact, lenders are encouraging businesses to apply through multiple lenders, to increase their chances of getting processed in time.

    If youâre applying for a Second Draw PPP loan, we recommend applying through your first lender, as your information can be carried over. Many fintech lenders like BlueVine will still accept new Second Draw applications thoughâjust make sure you know your original SBA PPP loan number.

    Does Ftb Follow The Federal Guidance Under Revenue Procedures 2021

    • Rev. Proc. 2021-48 FTB will follow the rationale of the federal guidance set forth in Rev. Proc. 2021-48.
    • Rev. Proc. 2021-49 FTB will follow the rationale of the federal guidance set forth in Rev. Proc. 2021-49.
    • Rev. Proc. 2021-50 FTB will not follow the federal guidance set forth in Rev. Proc. 2021-50 because California does not conform to the underlying federal statutes.

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    How Do I Apply

    You can apply for the Paycheck Protection Program through an SBA-backed lender. We recommend applying through your own financial institution to startâa lender you already have an existing banking relationship with. That will be the fastest way to get approved.

    Next, we recommend applying for PPP through a community bank. They have less demand and will likely be able to process you faster.

    If youâre applying for the PPP for the first time, refer to our guide for First Draw loans.

    Second Draw loans have some additional requirements. Weâve put together a separate Second Draw application guide here.

    How To Enter Ppp Loans And Eidl Grants In The Individual Module

    An Independent Contractor

    This article will help you report Paycheck Protection Program loan forgiveness and Economic Injury Disaster Loan advances on individual returns. Since these loans and grants are nontaxable for federal purposes, you won’t typically enter them as income for federal forms such as Schedule C, Schedule E, or Schedule F. However, you may be required to make state adjustments to income or expenses based on the funds received and what they were used for.

    When completing a 1040, remember:

    • For federal purposes, income from forgiven PPP loans and EIDL grants is not taxable.
    • The expenses you can normally deduct from federal income, like advertising and office expense, are still deductible for federal purposes – even if the expenses were paid with a PPP loan.
    • Some states don’t conform to one or both of these provisions.

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    Can I Deduct Business Expenses I Paid With My Ppp Loans

    It depends. To qualify for expense deductions, basis adjustments, and lack of reduction of tax attributes related to AB 80, you must meet the following qualifications.

    • Your business cannot be publicly traded.
    • You meet the 25% gross receipts reduction qualifications.

    If your forgiven loan was an EIDL grant or Targeted EIDL advance, you are not required to meet these qualifications to deduct expenses.

    If you do not qualify for the expense deductions under AB 80, California follows Rev. Rul. 2020-27, which may allow for some limited deductions.

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    Rent Mortgage And Utilities Expense

    The Paycheck Protection Program funding can cover your office lease, rent, or mortgage interest, provided that you had it before February 15 2020. If you have a home office, you can claim a portion of the expenses .

    Again, collect any paid invoices, statements, lease agreements, or cancelled checks that will help prove you had these expenses.

    However, if you want to have your loan forgiven, you must spend 60% of the loan funds on payroll costs .

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    Amending 2020 Tax Returns

    Taxpayers do not need to amend their 2020 tax return just to attach the Rev. Proc. 2021-48 statement if they properly reported tax-exempt income from a forgiven PPP loan on their 2020 tax return in accordance with Rev. Proc. 2021-48.

    Taxpayers who did not report tax-exempt income from a forgiven PPP loan on their 2020 tax return, but should have, need to file an amended 2020 tax return, or an Administrative Adjustment Request , if applicable, to report the tax-exempt income and include the Rev. Proc. 2021-48 statement.

    Likewise, taxpayers who report tax-exempt income from PPP loan forgiveness prior to the year when forgiveness of the PPP loan is actually granted should consider filing an amended return for the year the tax-exempt income was reported if the amount of tax-exempt income reported is more than the forgiveness ultimately granted. The amended return should include a statement that contains the following information:

    • The taxpayers name, address, and EIN or SSN
    • A statement that the taxpayer is making adjustments in accordance with Section 3.03 of Rev. Proc. 2021-48 and
    • The tax year in which tax-exempt income was originally reported, the amount of tax-exempt income that was originally reported in that tax year, and the amount of tax-exempt income being adjusted on the amended return.

    For more information regarding these new reporting requirements, contact us. We are here to help.

    % Reduction From Gross Receipts

    SBA Releases NEW PPP Loan Calculation Formula Rules for Self Employed & Schedule C Filers

    California conforms to the federal gross receipts test requiring a 25% or greater reduction in gross receipts and will therefore follow the rationale of this related federal guidance.

    For additional information, visit Section 311 of the CAA, 2021, Revenue and Taxation Code section 17131.8), and Small Business Administration guidance.

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    There Are Very Few Things You Could Do To Actually Disqualify Yourself

    In the frenzied early days of COVID, as PPP was created in great haste to keep businesses from potentially collapsing, the loans were simple to get: Companies simply had to pledge that the economic threat of the pandemic made the funding necessary. But what it would take later to qualify for forgiveness was hazy.

    “It was entirely unclear at the beginning,” said Eric Lichatin, a commercial loan officer at Centreville Bank in Rhode Island, which was inundated by calls from customers wanting PPP loans. “The SBA really rushed to get this program out there, which I think they should be commended for … but a lot of the details were very unclear to businesses and banks.”

    As the program evolved, its rules became increasingly complicated, and even experts struggled to make sense of them. At one point, the SBA published a list of frequently asked questions on loan forgiveness that was 11 pages long. One consulting firm issued a client advisory with the headline “Fast and furious: The rules for the PPP … continue to emerge at a brisk pace, often updating previous guidance.”

    That confusion posed a dilemma for many companies: Should they take the money if they might have to pay it back?

    Some banking professionals, including Lichatin, advised their customers to accept the funding, put it in a separate account, and wait to use it until the rules became more clear.

    That recommendation proved wise, because Congress weakened PPP forgiveness criteria over time.

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